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Goldman Sachs: Recession to Come

The U.S. economy will slide into a recession in 2008, the firm stated in a note to clients.

January 9, 2008, 07:00 pm

NEW YORK -- In a note to clients yesterday, investment firm Goldman Sachs backed a similar claim made by Merrill Lynch earlier this week -- in 2008 the U.S. will experience a recession, Reuters reported. The state will cause the Federal Reserve to slash benchmark lending rates to 2.5 percent by the third quarter, Reuters reported, citing the note.

Goldman expected real gross domestic product (GDP) to contract by 1 percent on an annualized basis, in both the second and third quarters, while for the entire year, the firm said GDP would rise by 0.8 percent, the report stated.

Meanwhile, Goldman said in the note that it expects the unemployment rate to rise to 6.5 percent in 2009 from the current 5 percent.

As a result, Goldman expects the weakened economy will force the government to lower policy rates by an additional 1.75 percentage points from the current 4.25 percent, Reuters reported.

"According to our analysis, this [recession] isn't even a forecast anymore, but is a present-day reality," he stated, noting the four key barometers used by the National Bureau of Economic Research (NEBR) -- employment, real personal income, industrial production and real sales activity in retail and manufacturing.

He stated these "seem to have peaked around the November-December period, strongly suggesting that we are actually into the first month of a recession."

An official ruling on whether the U.S. is in recession is made by the NBER, and the decision may not come for two years. The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months." It bases its assessment on final figures on employment, personal income, industrial production and sales activity in the manufacturing and retail sectors.